Debt Payoff

How to Pay Off Student Loans in Five Years

How to Pay Off Student Loans in Five Years
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We hear a lot about the student loan debt crisis, but what are the numbers?

The total outstanding student loan debt in the U.S. is $1.52 trillion, and the time it takes to pay off those loans ranges from 10 to 30 years.

It takes some people even longer than 30 years. Americans between the ages of 60 and 69 still have over $85 billion in student loan debt.

If you’re a recent graduate and you’d like to avoid using your future Social Security check to pay off your student loans, you should start putting a payoff plan into place immediately.

Doing so will save you thousands of dollars (perhaps tens of thousands, depending on how much you’ve borrowed) and put you on a strong financial footing if you decide to buy a home or start a family.

And even if those traditional life milestones aren’t part of your goals, getting that huge debt burden off your shoulders will give you more freedom to carve out your own path and live the life you want.

In this post we’ll show you how to pay off student loans in five years or less and become one of the many student loan success stories.

Step #1: Calculate Your Monthly Payment

Before you dismiss the idea of paying off your student loans in five years, you need to know what number you’re working with. It might be less than you think (or it might be more). The specific number doesn’t matter at this point — you just need to know it.

For our example, let’s say you have a loan balance of $40,000 with a 6% interest rate. Five years is 60 months, so your monthly loan payment would be $773 per month.

You can use this calculator to plug in your numbers and get your monthly student loan payment goal.

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If you can afford the sum shown by the calculator, log into your student loan servicer account (Nelnet, Great Lakes, etc.), change your monthly payment amount to that number, and set up autopay.

If you can’t afford that amount just yet, don’t worry: we’re going to show you how to get there. As you pay down the debt, cut your spending, and increase your income, you can go back to the calculator and get an updated monthly number.

Step #2: Cut Your Expenses

Every dollar you save is a dollar you can toss at your student loan debt, but there are a handful of strategies that work better than others.

Tip #1: Live Like a Student

If you’re a recent college grad, you’re probably used to living a frugal life. You might even be sick of it. But if you can bear to pinch pennies for just a little bit longer, you’ll reap a reward in the not-too-distant future.

The uncomfortable reality is that a big part of the reason people take decades to pay off their student loans is because of a phenomenon called “lifestyle creep.”

They get their first job and buy a new car.

They get their first raise and move into a nicer, more expensive apartment.

They get a bonus and they take an overseas vacation.

I get it. You’re finally making some money and you want to enjoy life a little bit.

But it’s harder to reduce your expenses and cut out luxuries once you get used to them (which doesn’t take long when you’ve been eating instant ramen off a plastic milk crate table).

But if you can stick it out just a bit longer you should continue living with a roommate, keep driving your perfectly serviceable old car, and keep living frugally while making sensible rather than extravagant upgrades.

If you want to save real money, the key is to keep your housing and transportation costs as low as possible. You can clip all the paper towel coupons you want, but those small savings aren’t going to make a substantial difference in your student loan payoff schedule.

Cutting housing and transportation expenses are where you’ll find the most savings, which can then be applied to your loans. Living with a roommate can easily shave 40% to 60% off your rent, depending on your arrangements, which amounts to between a few hundred and $1,000+ per month depending on where you live.

Likewise, if your current car runs fine, save the $250 per month that you’d spend on a new set of wheels and drive that thing until it literally falls apart.

Tip #2: Build a Realistic Budget

I know: you’re all-in on paying off your student loans in five years, so you’re going to really squeeze your budget. You can live on $50 a month for food (instant ramen, mac and cheese and PB&J, anybody?) and you won’t spend more than $5 a week on entertainment.

That’s not what I mean when I say, “live like a student.” It’s OK to up your lifestyle a little bit. And frankly, improving your diet with fresh, healthy foods is a great investment. You’ll feel better and be more productive (not to mention save money on health care costs in the long run).

You don’t have to live in a constant state of misery. That’s not realistic anyway, because it’s not sustainable.

Instead, aim to make a realistic household budget. You know where you spend too much and where you can afford to cut back without making yourself miserable in the process.

This is where I recommend having some way to track your finances. I used for years, but feel it’s a bit too cluttered now. Recently, I switched to Truebill Budget and Bill Tracker, which lets you see your income, expenses, and monthly cash flow on one easy screen.

But again, it’s important to focus on what really matters: trimming $10 off your monthly video streaming subscriptions isn’t going to make a huge impact on your debt load, but saving even 10% per month on your rent absolutely will.

Step #3: Grow Your Income

At some point, you won’t have anything left in your budget to realistically cut. Now it’s time to make some extra money.

Tip #1: Pick up a Side Hustle

When you want to make money, there are dozens of side hustle ideas that can help you do it. But you should be strategic when you pick a side hustle. By strategic, I mean a side hustle that will not only make you money but also make you a more valuable employee in your field.

If you’re in marketing, for example, find a niche within the field, like SEO, and learn everything you can about that topic. There are tons of good career and side hustle opportunities for SEO experts, but having that expertise will also give you leverage in your core profession,

Tip #2: Plan Your Career Two Years at a Time

Loyalty literally does not pay. Those who stay with the same company for more than two years will make 50% less over the course of their careers than those who “job hop.” This is completely unsurprising.

If you’re considered an average employee, your average raise will be 2.7%. If you’re considered one of the top employees, it’s not much better — you’ll get an average raise of just 4.6%. That barely keeps pace with inflation! But a job change can mean a raise between 10% and 20%. Less than a 5% raise isn’t going to do much to help you speed up your loan repayment, but 10% or 20% certainly will.

Step #4: Refinance Your Student Debt to a Lower Rate

Should you refinance your student loans as part of your five-year plan? Most likely, the answer to that question is an emphatic “yes.” One of the best ways to save money is to reduce the amount of interest you pay — and that’s what happens when you refinance your student loans.

A student loan refinance means you borrow money from a new lender at a lower interest rate than your current one. Even a small difference in your interest rate can save you a lot of money — we’re talking about thousands of dollars over the life of a loan. There are other benefits, too.

There are a number of lenders that specialize in student loan refinancing:

  • Credible: A marketplace for student loan refinancing. It will show you offers from up to eight lenders, allowing you to compare rates and terms in one convenient place so that you can choose the best fit for you.
  • SoFi: If your salary isn’t huge, SoFi might be the best fit for you. To be eligible with SoFi,  you do need to either be employed, have a job offer with a start date of 90 days or sooner, or have sufficient income from other sources. SoFi also looks at factors like your financial history, credit score, career experience and monthly income vs. expenses.
  • LendKey: Works with community banks and credit unions, so you may find a lower rate than with other marketplaces that only work with bigger, traditional lenders.
  • Earnest: Looks at more factors than just your credit score when approving a loan. So, if you have little or less-than-ideal credit, this might be your perfect match.

When you refinance, you’ll get new loan terms and a new minimum payment. There’s no limit to the number of times you can refinance, so it’s a good idea to shop around a couple of times during this period.

One important thing to keep in mind, however, is that when you refinance federal student loans they become private loans, which means you’ll no longer have access to certain federal programs like loan forgiveness. This won’t matter if you hit your five-year target, but should be a consideration if you’re not sure about your ability to fully execute this plan.

For more information, check out our free guide to student loan refinancing

Summary: Paying Off Student Loans in Five Years

Five years might not seem like a lot, but when it comes to paying off student loans, it’s a good chunk of time and a very realistic schedule. If you commit to this five-year plan and follow the steps we’ve outlined, it’s absolutely doable.

And while this plan is not without some sacrifice, we promise it will be worth it. Once you’re debt-free and the student loan monkey is off your back, you’ll find that you have so much more freedom and so many more choices.

Notably, it makes it faster and easier to save for a wedding, a home, and to travel. It may allow you to become a single income family, so one parent can stay at home and raise your children, or to retire a decade or more before your debt-laden peers.

When you think of it that way, five years is really no time at all.

Keep in mind that many popular repayment options can make your monthly payments more affordable, but those programs will likely increase the amount of money you’ll pay over time.

For example, if you’ve been living tight for the past four or five years, you might be tempted to opt for an income-based repayment plan, which limits your monthly payment to a certain percentage of your income. Or, you might be considering deferment options so you don’t have to pay anything right now. The trouble is, you’ll still be racking up student loan interest during those periods.

So, if you’re able, following these steps is your best course of action. If for whatever reason you can’t put this plan into practice, make cutting down your student loan balance a priority: earn some extra income, look for ways to reduce your cost of living, and use whatever you save to make extra payments that will shorten your repayment period.

R.J. Weiss
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner™, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.

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